Apple: Qualcomm Doesn’t Deserve to Earn Revenue on Every iPhone

Posted onJune 25, 2017June 25, 2017

For the past few years, Qualcomm has been the undisputed king of premium smartphone SoCs. While not every company uses Qualcomm’s Snapdragon processors, its LTE modems have been extremely successful. Other companies have begun to take more market share, but for several years, Qualcomm virtually owned the entire LTE market.

Other companies and governments have alleged Qualcomm’s meteoric success in the 4G/LTE space may have had more to do with its willingness to abuse its de facto monopoly in LTE modems, as opposed to unilaterally building the best product. Apple has already filed suit against Qualcomm, but now the company is broadening the scope of its attack.

The Story So Far

In January, Apple sued Qualcomm, claiming that the SoC and modem manufacturer had improperly withheld $1B in rebate payments in retaliation for Apple working with the Korean FTC. The KFTC’s investigation ultimately resulted in an $850 million judgment against Qualcomm (our own FTC is also investigating). At the time, Apple alleged that Qualcomm had refused to make its agreed-upon rebate payments “as retaliation for responding truthfully to law enforcement agencies investigating them.”

Image by StrategyAnalytics. Qualcomm’s market share has shrunk in recent years, though it still commands a great deal of the LTE market.

Now, Apple has widened the scope of its allegations and case against Qualcomm, thanks to a Supreme Court decision issued last month in the case Impression Products Inc. v Lexmark International Inc. In that case, Lexmark argued that it had the right to control whether its printer cartridges could be refilled by third parties once the original ink ran out. Impression Products, in contrast, argued Lexmark’s patents on its ink cartridges were no longer applicable (the term used in the case is “exhausted”) once the sale was made, even if the customer had signed an agreement saying they would not refill the cartridges. In an 8-0 decision, the Supreme Court ruled that Lexmark had no right to enforce the terms of this agreement, writing:

When a patentee chooses to sell an item, that product is no longer within the limits of the monopoly and instead becomes the private, individual property of the purchaser, with the rights and benefits that come along with ownership. A patentee is free to set the price and negotiate contracts with purchasers, but may not, by virtue of his patent, control the use or disposition of the product after ownership passes to the purchaser. The sale terminates all patent rights to that item.

So how does this relate to Qualcomm?

Apple’s New Argument

According to Apple, it currently pays Qualcomm both a per-chip fee and a patent license fee. Apple is hoping it can use the recent Supreme Court case to force a reconsideration of this issue. If, as SCOTUS wrote, the patent holder has no right to control the use or disposition of a product once it’s purchased, than Apple may be able to dodge the ongoing royalty rate.

Alternatively, Qualcomm can choose to sell chips to Apple at whatever royalty rate the two companies agree on. But Apple would then (it hopes) be released from having to buy each and every chip outright. Apple is asking the court to stop requiring it to pay Qualcomm a fee on each and every iPhone sold, and to halt the lawsuits Qualcomm has filed against Foxconn, the smartphone manufacturer that builds Apple’s devices.

Patent maneuvers between large corporations are nothing new. Six years ago, a persistent rumor made the rounds that Microsoft actually made more money off Android devices than it did from its own smartphones. As for whether Apple or Qualcomm comes out on top in this dispute, it’ll largely depend on whether judges in lower courts agree the new precedent established by Impression Products Inc. v Lexmark International Inc. should apply in this case.

There’s no word on how this may impact the antitrust cases filed by other companies, or the threats lobbed by Intel over x86 emulation baked into upcoming versions of Windows 10 intended to run on the Snapdragon 835.